Telia's Dividend Strategy: Is the 8.1% Yield a Sustainable Attraction?

In the world of dividend investing, Telia Company AB (STO:TELIA) has long been a magnet for income-seeking investors. Its current dividend yield of 5.8% (as of July 2025) appears enticing, but whispers of a once-mighty 8.1% yield from earlier this decade raise a critical question: Is Telia's dividend strategy a sustainable win for shareholders, or a cautionary tale of overpayment? Let's dissect the numbers, history, and financial health to determine whether this telecom giant's dividend is a golden goose or a ticking clock.

The Allure of the 8.1% Yield: A Historical Anomaly

Telia's dividend yield peaked at 8.1% in 2015, a period marked by a sharp decline in its stock price (from SEK 34.22 to SEK 29.70) and a stubbornly high dividend of SEK 3.00 per share. This yield was a product of market turmoil rather than robust earnings. By 2020, however, the yield had plummeted to 1.83% as Telia slashed its dividend to SEK 0.65 per share—a 27.78% drop—amid restructuring efforts. The current 5.8% yield, while attractive, is part of a long-term trend of declining payouts.

The discrepancy between the historical 8.1% and today's 5.8% is not a sign of Telia's renewed strength but rather a reflection of a shrinking dividend base. Since 2015, Telia's dividend per share has fallen by 83%, from SEK 3.00 to SEK 0.50. The yield's current allure is thus a mix of nostalgia and market psychology, not a new era of shareholder generosity.

Financial Health: A High Payout Ratio, But Not a Death Sentence

Telia's 147% payout ratio—meaning it pays out more in dividends than it earns—raises red flags. However, this metric must be contextualized. While earnings per share (EPS) have declined by 5.2% annually over the past five years, Telia has managed to fund its dividend with 82.3% of free cash flow, a more sustainable metric. This suggests the company is not entirely reliant on accounting profits but rather on cash generation to sustain its payouts.

Yet, the margin of safety is slim. A 147% payout ratio implies that a minor earnings downturn or a spike in operating costs could force Telia to cut dividends. This is not hypothetical: Telia has already reduced its dividend by 4.0% annually over the past decade. The company's recent Q2 2025 report, while showing 6.2% EBITDA growth and a 200 basis point margin expansion, also highlights a 147% payout ratio and a 14.1% debt-to-EBITDA ratio, which, while improved from 2.09x leverage, remains elevated for a telecom firm.

Strategic Moves: Can Growth Offset Dividend Risks?

Telia's leadership has pinned its future on two pillars: 5G expansion and acquisition-driven growth. The recent acquisition of Breband Two in Sweden, expected to generate SEK 200 million in synergies, and its 5G rollout in Lithuania are designed to boost revenue and reduce churn. These initiatives could stabilize earnings and, by extension, dividend sustainability.

However, the path is fraught with risks. The Breband Two acquisition is subject to regulatory delays, and increased capital expenditures (CapEx) will pressure short-term cash flow. Telia's target of €10 billion in free cash flow by 2027 is ambitious but hinges on successful integration and 5G adoption rates. For now, investors must accept that Telia's dividend is a bet on future growth rather than a guarantee of present stability.

The Investor Dilemma: Yield vs. Risk

For risk-averse investors, Telia's current dividend strategy is a red flag. A 147% payout ratio, declining EPS, and a history of dividend cuts make it a poor fit for portfolios prioritizing income security. However, for speculative investors who believe in Telia's 5G and acquisition-driven turnaround, the 5.8% yield could be a compelling entry point—provided they are prepared for volatility.

The key differentiator lies in cash flow coverage. While earnings are strained, Telia's ability to generate SEK 400 million in free cash flow (Q2 2025) and reduce net debt by €1.5 billion since 2024 suggests the company is not in immediate distress. This gives it breathing room to weather minor earnings dips without triggering a dividend cut.

Final Verdict: A High-Yield Gamble, Not a Safe Harbor

Telia's 5.8% yield is undeniably attractive in a low-interest-rate environment, but it comes with caveats. The dividend is not well-covered by earnings, and the company's financial health remains fragile. While strategic moves like 5G and Breband Two offer hope, they also introduce execution risks.

For investors seeking dividend safety, Telia is a pass. For those comfortable with high yield and moderate risk, it could be a speculative play—provided they monitor cash flow trends and earnings closely. The 8.1% yield of 2015 was a market correction, not a sustainable model. Today's 5.8% is a similar anomaly, driven by a shrinking dividend base and cash flow, not earnings resilience.

In the end, Telia's dividend strategy is a high-yield gamble. It's not for the faint of heart, but for those who can stomach the volatility, it offers a compelling mix of income and growth potential—if the company can execute its turnaround.